U.S. Inflation: Key Metric Shows Prices Rose at Fastest Level in Almost 40 Years

by Chris Haney
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On Friday, the U.S. Department of Commerce reported that prices shot up faster in the last year than they have since 1983. Yet price hikes did not stop consumers from spending aggressively. The Federal Reserve’s primary inflation gauge, the core personal consumption expenditures (PCE) price index, increased by 5.2% compared to a year ago. That’s the highest increase in almost four decades, and just above the Dow Jones estimate of 5.1%.

What You Need To Know

  • Inflation increased by 5.2% in January compared to a year ago, according to the Federal Reserve’s preferred core PCE price index.
  • That’s the largest increase over one year since April 1983.
  • Consumer spending in January jumped 2.1% for the month, which is more than the expected 1.6% estimate.
  • Durable goods orders mirrored increased spending as they doubled compared to expectations.
  • Rent prices continue to surge across the nation as they contribute to higher inflation as well.

Inflation Rises as Consumer Spending Increases

The official core inflation measure is defined as the rate of change of headline consumer price index (CPI) following exclusions of certain food and energy items. Headline inflation is calculated as the annual change in the overall CPI as determined by the Planning and Statistics Authority (PSA).

While consumer prices rose significantly as mentioned, the PCE is even higher including food and energy costs. Headline PCE is up 6.1% over the last year with those included, which is the strongest gain since February 1982. Per month over the last year, core PCE rose 0.5% as the rate stayed in line with estimates. Additionally, headline gain went up by 0.6%.

The Commerce Department’s recent report also showed that consumer spending increased faster than expected. It rose 2.1% on the month compared to a 1.6% estimate. In December though, the spending increase declined by 0.8%. While personal income was flat that month, the 0.8% decrease was much better than the expected drop of 0.3%.

Real disposable income, or after-tax income, fell 0.5% as expired child tax credits offset wage gains and adjustments to Social Security checks. The report also shared that personal savings totaled $1.17 trillion. That translates to a 6.4% rate, which is the lowest since December 2013.

Worker Pay Increased, Kept Demands for Goods High

When it comes to markets, inflation has been key as price gains continue at their strongest levels in decades. Runaway increases are the highest since the 1970s and early 1980s. At that time, the Federal Reserve implemented interest rates that pulled the economy into a recession.

Today, policymakers have hinted that interest rate spikes are on the way. Most central bank officials have stated they expect increases next month in March. They also expect increases to occur at most, if not all, of their upcoming six meetings in 2022. Capital Economics chief U.S. economist Paul Ashworth recently touched on inflation and said that things aren’t as bad as some feared. He also shared how the Russia-Ukraine conflict will impact the economy.

“Overall, the real economy appears to be in stronger health than we feared, suggesting that the Fed will push on with its planned rate hikes starting in March. Although the Ukraine conflict makes a 50 [basis point] hike less likely,” Ashworth wrote.

The Federal Reserve’s Friday report showed energy increasing at 1.1% last month. Further, in January, food costs shot up 0.9% as services inflation slowed, rising only 0.4%.

Inflation also impacted worker pay, with salaries and wages increasing by 9.3% in 2021. Worker salaries and wages only increased by 1.3% in 2020. However, in January 2022, pay rose 0.5%, which was at a slower rate than December 2021’s 0.7% increase. The worker pay hikes have put more money in people’s pockets who in return have kept the demand for goods high.

Rent Prices Surge As They Drive Up Inflation

Another driving force behind higher inflation is surging rent prices. According to recent reports, rents are reaching all-time highs in cities across the United States. Rent prices have skyrocketed in recent years, especially in the nation’s 50 largest metro areas.

Rents continue to rise rapidly and have ever since a federal moratorium on rent spikes and evictions came to an end in August 2021. Between December 2020 and December 2021, average rents shot up by a whopping 19.3%, according to Realtor.com’s recent analysis of rental properties.

There are many factors in the rent hikes, including the fact that homes for sale are at an all-time low. Without a solid resell market, many potential home owners are forced to rent. The demand is extremely high right now for rentals, but vacancies are at their lowest since 1984 at only 5.6%.

These abrupt rent price spikes continue to contribute to inflation’s largest jump in four decades. Experts expect more of the same for the foreseeable future. Economists have predicted that rent prices will keep inflation high throughout the rest of this year at a minimum.

Outsider.com